9th January 1999 Archive

Oxford Circus is a mere stone's throw from the HQ of Situation Publishing -- which publishes The Register and a few other titles, and we were working on Christmas Eve, as you no doubt realised. Some of us here are little imps, so when we tipped out of Oxford Circus tube on the way to Mayfair we were perturbed to see one major store had already put its fir tree, complete with fairy lights, onto the pavement for collection by the rubbish men and women of this world. We thought: "Ah, there was a reason for us to come in, Christmas is sorta dead." As we'd climbed the escalator, Liberty's sale on the 27th was already advertised on the walls. Unfortunately, a mere four weeks earlier, the same staffer was in Tokyo and heard his first Christmas Carol at Tokyo railway station in late November, but was shocked to see as well as hear that Japan, which is not a Christian country, had closely linked Santa Claus to Jesus Christ.

A former senior staffer has settled out of court, possibly for $4m - but the SEC may still be interested

A senior whistleblower who had accused Microsoft of systematically distorting its figures has settled out of court with the company, leaving hanging the question of whether or not the US Securities and Exchange Commission is investigating his claims. According to a story published in the Seattle Weekly earlier this week, Charlie Pancerzewski had been claiming unfair dismissal under the US Whistleblowers Protection Act. He claimed to have been forced to resign in 1995 after reporting his suspicions about Microsoft bookkeeping to CFO Mike Brown and COO Bob Herbold. Pancerzewski had been head-hunted for the post of chief of internal audits by Bob Herbold, then CFO, in 1991, having previously been a partner at Deloitte, Haskins & Sells ( now Deloitte Touche). His performance evaluations until 1995 were excellent, but shortly after reporting his suspicions he was given a snap, unfavourable evaluation, and shortly afterwards given the option of resignation or dismissal. The Whistleblowers Protection Act applies in cases such as this in the US. Pancerzewski claimed that he'd identified possible breaches of SEC rules, but that when he'd told his superiors, he'd been elbowed out. He filed under the Act in 1997, and after several months of pretrial motions the judge denied Microsoft's motion for summary judgement on the grounds that she found that there was evidence that Pancerzewski's allegations could be true, and that Microsoft had indeed violated SEC rules. This process will be familiar to Microsoft trial watchers. Motions for summary dismissal are commonplace, and depend on it being shown that there is no case to answer. If there is evidence that's worth considering, then the judge will throw out the motion, as happened here. But then in November Microsoft and Pancerzewski settled out of court. It was a civil action, so this is perfectly normal, but as the terms of the deal are secret, neither Pancerzewski nor Microsoft will talk about it. The Seattle Weekly claims sources say he got $4 million. But court records of the case show Pancerzewski had claimed he'd been ordered to destroy a consultant's report about potential tax liabilities in Europe, and that he'd found that Microsoft was controlling the level of reported income by switching money back and forth from reserves. Much simplified, this procedure involves putting money into reserves in good times, and transferring it back into reported income when times are hard. It's used to keep earnings apparently growing smoothly, and it is illegal, under SEC rules. The judge threw out some of his allegations for lack of evidence, but retained this one. Microsoft itself claims that its actions were legal, and his departure entirely unrelated to his claims. But if the judge found evidence of smoke, nostrils at the SEC will surely be twitching. Register factoid: To our recollection, for several years now Microsoft's high command has habitually predicted tougher times ahead, and then Microsoft has habitually outperformed the (Microsoft-briefed) analysts' predictions when its results have been filed. ®

According to the document, Microsoft has systematically overcharged and blocked the sale of cheaper PCs

In a damning report on Microsoft pricing, the Consumer Federation of America has concluded that Microsoft has a monopoly, is abusing it, and should be fined a minimum of $10 billion. The Federation says that the monopoly is "literally a license to print money that comes directly out of the consumer's pocketbook." Which is a curious way to put it, when you think about it - any whirring noises from your pocket? But the report, (Full Report) The Consumer Cost of the Microsoft Monopoly: $10 billion of Overcharges and Counting, is one of the most detailed studies yet of Microsoft pricing, how it relates to Microsoft financial performance, and how it affects the industry as a whole. It uses independently derived figures along with data that has come into the public domain via the antitrust trial, and backs its case with copious quotes from many of our favourite Microsoft executives. OEM VP Joachim Kempin plays what is arguably a starring role. The report's minimum fine recommendation is derived from its studies of what Microsoft pricing has been, and what it thinks it should have been, the difference so far being in the vicinity of $10 billion. It also predicts that if no action is taken overcharges during the next two years will total $15 billion, so says "it is critical to quickly obtain a final result that stops the abuse of monopoly power." That is, a remedy that forces Microsoft prices down and keeps them there needs to be found. One of the report's key conclusions, supported by Kempin's Desktop Operating System Strategy memo to Bill Gates in December 1997 (Microsoft's plan to levy annual rental fee for Windows), is that Microsoft's insistence on keeping the cost of the OS above $100 has severely hampered the development and sale of low-cost PCs. The Federation reckons that without this, 50 per cent of the US homes that don't have PCs would now have them. It (or alternatively, our old friend Joachim) concludes that this strategy puts Microsoft at fundamental odds with the low-cost PC business. In Kempin's words: "Expand the high-end market [by giving OEMs] air cover by promoting high-end PCs purchases by providing more future technology direction" while on the other hand "Prevent low-end systems from expanding market share [by resisting] < 1k PC royalty prices firmly." And in the report's: "The evidence is overwhelming that Microsoft overprices its products and is engaged in the vigorous defence of those excessive prices. In order to defend its monopoly profits, Microsoft has launched a campaign against the low cost PC." But the Federation also points out that the amount of cash Microsoft has built up would make the fine more or less chump change, and that the company's reserves allow it to "pay huge premiums to purchase companies as strategic investments to defend its market power in the operating system." Which of course suggests that some form of remedy is necessary to deal with this as well. "The irony is that the monopoly has been so potent that even if Microsoft were force to pay this sum as a fine, it could write a check from cash on hand and still have more cash, relative to its ongoing operations than most companies keep. At the end of the third quarter of 1998, Microsoft had $17 billion in cash. It had added $7 billion in 1998," says the report. Also using Kempin as the source, the report points out that Microsoft doesn't expect major revenue increases from expanding the market (which would occur with the rise of the low-end PC), but via software upgrades "Microsoft expects 80 million consumers will be forced to buy new computers to support its operating systems," and via the shortening of PC lifespans in general. The report reckons that average Microsoft revenue per PC for preinstalled software rose from $25 to $62 from 1990 to 1996. Price increases, despite Microsoft denials, it puts at from 4.1 per cent to 7.9 per cent annually from 1990 to 1998, using its own, Microsoft (Joachim again) and PC Data numbers. Compared to this it quotes Microsoft memos as putting CPU prices decreasing 10-15 per cent over 1996-98, and software costs in general being in steady decline (-2.8 per cent per annum from 96, according to PC Data). This has resulted, the report says, in spectacular profits: "The other companies in the industry earned just about the national average return on equity in 1996, 1997 and 1998. Thus, the overall computer industry is a good barometer for estimating competitive returns. Microsoft's return on equity is much higher than the other comparison groups of companies. It has a ROE of above 30 percent in the past three years. The return on equity is approximately twice as high as the industry as a whole. "Microsoft's profit margins are extraordinarily high. In 1996 Microsoft had a profit margin of just under 26 percent. The margin was over five times higher than the software and services sector and the hardware sector. The advantage over the other groups was even greater. While the profit margins of the other companies were stable in 1997 and 1998, Microsoft's profit margin rose to 30 percent in 1997 and reached 37 percent through the first three-quarters of 1998. Its margin is three times that of the other firms in the software/internet business. It is eight times that which the hardware sector earns." Over to you, Mr Gates... ® Complete Register trial coverage